by Alexander W. Salter
The American Institute for Economic Research
When scholars write the history of the policy response to COVID-19, they will say the Federal Reserve failed in its primary responsibility: maintaining monetary stability.
The Fed’s current plan to contain the economic fallout caused by the pandemic amounts to $2.3 trillion in asset purchases. Some of this is conventional monetary policy. But it also includes a lot of direct lending to non-financial businesses, as well as state and local governments. These new activities may very well be illegal, but that has not seemed to slow the Fed down.
The Fed’s approach, which focuses on balance sheets rather than conventional aggregate demand stabilization, suggests Fed officials have lost sight of their primary role. We use money to buy goods and services. Everything trades against money.